The latest communication from Brussels to Budapest: No extra levy on telecoms

Last October the Hungarian government levied a hefty tax on the telecommunication companies. Prime Minister Viktor Orbán and his right-hand man, György Matolcsy, were hoping to receive 61 billion forints over three years from this source.

At the time of the announcement there were some--most notably Jonathan Todd, spokesman for Neelie Kroes, European Commissioner for Digital Agenda--who said that this extra tax on the telecoms might not be legal under European Union rules. A few years ago Brussels decided that member countries should assist the rapid growth of the industry because Europe was somewhat behind in the telecom revolution compared to other parts of the world. Therefore if any extra taxes are levied, they should be used only for the benefit of the industry. As we know, the Hungarian government desperately needs this money in order to keep the deficit under 3.0%, so the money collected was destined not for expanded telecom coverage but for the general budget.

In spite of warnings the government went ahead with the telecom tax. The first installment of the extra levy had to be paid by December 2010 and the tax, just as in the case of the banks, was stiff. On profits between 100 and 500 million forints, the company had to pay a levy of 2.5%, between 500 million and 5 billion forints 4.5%, and over 5 billion 6.5%. Péter Szijjártó confidently announced in March that the Hungarian decision was perfect in all respects and that it doesn't go against EU regulations.

It turns out that the European Commission does not agree with Szijjártó's assessment. It handed down its decision today: the levy does not comport with EU rules. The situation is as follows. Budapest can still negotiate, trying to convince the European Commission of the merits of the Hungarian government's position. However, if the negotiation fails, there are only two possibilities. Either the Hungarian government revokes the tax and returns the already collected first installment or it will face a law suit at the European Court of Justice.

Even before I read Szijjártó's announcement of the government's decision to go ahead and face the European Court of Justice rather than change the law, I suspected that the Orbán government would opt for the latter strategy. It is a well known fact that these court proceedings drag on for years and by that time either Viktor Orbán will not be the prime minister of Hungary and it will be his successor's headache if the case goes against Hungary or perhaps the Hungarian government thinks that in three or four years it will have enough money to reimburse the telecoms.

It seems that the Orbán government's big legal gun is "the proportional tax burden" argument, which in their opinion will tip the scale in Hungary's favor. According to Szijjártó, proportionality is a "European value," and the telecoms will have to take their fair share in the joint effort to save the country from financial and economic ruin. "Therefore the government of national affairs has no reason to change the law concerning the levy and it is ready to continue this debate before the European Court of Justice."

The proportionality argument most likely will not impress Brussels or the European Court of Justice because not all industries have to carry the same financial burdens. Only some, like banks, supermarket chains, and telecoms. It will be very difficult to explain that this is actually a fair distribution of tax burdens.

This and similar cases only intensify the antipathy Western European politicians feel toward Viktor Orbán. It was at the end of May that the Slovenian prime minister, Borut Pahor, rather undiplomatically announced to reporters that after Hungary's presidency of the European Union "Hungary will be isolated" as a result of  Viktor Orbán's behavior and policies. Pahor commented that Viktor Orbán was ignored even before July 1, 2011, the end of Hungary's six-month tenure.

Unlike in some better organized countries where the prime minister's calendar is readily available, in Hungary we don't have much knowledge of Viktor Orbán's daily schedule or his travel plans. However, today I read that Viktor Orbán paid a visit to Munich and "conducted talks" with Horst Seehoffer, the Bavarian premier (see picture below). It turned out that Orbán received a personal invitation to celebrate the 70th birthday of Edmund Stoiber, the former Bavarian premier.

Orbán apparently informed the Bavarian premier that "in the center of Hungary's economic policy is still the reduction of the sovereign debt in addition to the creation of jobs." In this endeavor he wants to work closely with Germany so that Hungary can become "the center of production of Central Europe." It must have been a very enlightening conversation.

While reading this piece of news it occurred to me that as far as I remember Viktor Orbán hasn't made an official trip abroad since July 1. And this one is only a private invitation to celebrate the birthday of a former premier of one of the sixteen German states. I really wonder whether there is a boycott of the Hungarian prime minister who causes so much trouble in the European Union as was predicted by the Slovenian prime minister and several papers or just a happenstance.

Comments

[Rigó Jancsi]

Ja gut... ähhh... der Orbán... der Ungar an sich... da steigt man in die S-Bahn und ist... und ist... ähhh... sechs Stunden später in Bukarest... äh.... Budapest... das ist phänomenal... ähhhh... der Orbán... ähhh... Horst, wer ist das doch gleich? Warum habe ich den eingeladen?

Sorry for the German, but whenever I hear "Stoiber", I start to splutter... :-)

[Ron]

Professor: It is a well known fact that these court proceedings drag on for years and by that time either Viktor Orbán will not be the prime minister of Hungary and it will be his successor's headache.

I think you will be surprised about the swiftness. I think the decision will be made in 2013 or 2014 at the latest. Therefore, it will be this government's headache.

For example, this VAT repayment issue, became an issue in 2004, but the Bajnai government should have solved it. And they did not. The decision was a year later.

However, if it will be the next government's problem. It will be a real problem as they most likely will not have a 2/3 majority and therefore, cannot adjust the tax law under the constitution.

[orban's victims]

I need more input.

The European court reviews cases, like the telecom tax, like the VAT, and the Hungarian parliament will be expected to create legal arrangement accordingly.
Will a corresponding compliance of the parliament be assured?

This is a constitutional puzzle between EU and Hungary.

[Some1]

I believe that Orban is in his way out from the EU. I think he really considers the "my way or the highway" approach. He will not accept any more "intervention" in his "Wonderland" he is creating for Hungary. Do not forget that this is the guy, who recently reinforced by open public speeches that "there is life outside the EU", the "EU cannot tell us what to do", the "West is in decline". His desire to attach Hungary to "Champion China" is well-known "secret". His ambitions for Hungary is the same as for himself, changing values, changing alliances, changing religions,depending on which direction are the "wind is blowing" from.

[Ron]

orban's victims: Will a corresponding compliance of the parliament be assured?

Even this new constitution need to be adjusted. EU law and/or verdict are higher than the Constitution. So if the Constitution is not adjusted than the law will be automatically superseded by the EU Court verdict. In other words the law will be null and void.

[Eva S. Balogh]

Some1: "I believe that Orban is in his way out from the EU. I think he really considers the "my way or the highway" approach."

But then there will be no more money from Brussels which he very badly needs.

[Johnny Boy]

Ron: "to be adjusted. EU law and/or verdict are higher than the Constitution. So if the Constitution is not adjusted than the law will be automatically superseded by the EU Court verdict."

Which part of the Constitution is not in accordance with which EU law?

[Mutt Damon]

Bajnai is on CNBC:

http://www.cnbc.com/id/44730394

[Ron]

Mutt Damon: Bajnai is on CNBC.
Yes, but it is about Greece, the EU and the economic situation in general, and what needs to be done or questions that needs to be addressed. Nothing about Hungary.

Talking bout Greece. Today, I was reading in one of the Dutch newspapers, that the Ministry of finance in Holland develop all kinds of scenarios for the Greek and EU borrowing situation. One of the scenarios is that they forgive 50% of the government debts to jump start the Greek economy.

As far as I understand the Greek debts is 130, compared to Hungary 77. If the EU follow this scenario (forgiving 50% debts), than in the end Greece end up with a debt of 65. I was just thinking if this was not the scenario the Greek PM was following. If so, he is a better player than VO.

[Some1]

Eva: "But then there will be no more money from Brussels which he very badly needs." He will get some money somewhere else, and he will write off Hungary's debt the same way as he wrote of the forex debt. He will repay Hungary's debt 1:2 or by some other scheme. Orban does not think for long term, if he would, he would not try to push everything through as it pops to his head.

[Some1]

Ooops, I just read Ron's comment about Greece's debt "(forgiving 50% debts)". Well, if Greece is already employing this technique, I bet Orban will use this as a precedent, but instead of my original prediction of 1:2 , he will use 1:3, because Hungary started lower.

[web design Landon]

I think the decision will be made in 2013 or 2014 at the latest. Therefore, it will be this government's headache.

For example, this VAT repayment issue, became an issue in 2004, but the Bajnai government should have solved it. And they did not. The decision was a year later. I was reading in one of the Dutch newspapers,